Facebook’s Crypto Strawman
If you haven’t heard already:
I mean, hey, good for Facebook for… going for it, I guess? After two-plus years of being called all sorts of nasty names – a threat to democracy, a nest of lies, a horde of children playing run-the-universe, you get the idea – Facebook has announced their newest plan to get everybody mad at them: they’re launching a new cryptocurrency / payments product for their users around the world. They call it “A simple global currency and financial infrastructure that empowers billions of people.” And it’s called Libra.
The actual mechanics of the Libra blockchain protocol are a real Rorschach test: whatever it is you already thought Facebook was doing, you’re probably going to keep thinking that, but armed with more talking points:
- Libra is a private, or “permissioned” blockchain that employs some of the “cryptographic irreversibility” properties that we like about the blockchain ecosystem, but otherwise is not an open, public blockchain protocol like Bitcoin or Ethereum. Think of it as a fancy database, with cryptographically rigorous read/write access, that is stored and operated by a distributed but restricted network of insiders that we are supposed to trust. Think payments processors like Visa, MasterCard and PayPal; merchants and service providers like Uber, Vodafone and Ebay, and of course Facebook itself. So (temporarily!) just take it for granted that, while this has “blockchain” in its name, this is Facebook launching a digital currency with a bunch of partners. It’s pretty far from Bitcoin, or a shitcoin ICO, or anything like that.
- Presumably, the real market for Libra isn’t well-banked American users who already have Venmo and PayPal and FDIC-insured checking accounts. It’s the hundreds of millions of people around the world for whom Facebook is essentially the entire internet, and for whom this would be one of their first real options for digital banking and payments. So right off the bat, I’d expect Libra’s strongest competitor (aside from regulatory / self sabotage / etc) to be Ant Financial.
- One Libra coin (I think that’s what they’re called?) is going to be pegged to the US dollar 1-to-1, for the foreseeable future anyway. Facebook claims that each Libra will be backed by actual money and/or legitimate securities like US Treasuries, and I believe them. Plus, I mean, they’re not some boiler room operation like Tether. They’re Facebook. They’re big enough to claim “we guarantee your Libras are worth a dollar” and have us take it seriously. This ought to grant Libra coins some nice properties, like low and predictable inflation, that we generally like in day-to-day currencies.
- Now here’s an interesting part, and where my understanding of how this’ll work is evolving along with everyone else’s. The partners that are going to maintain the payment network will have access to some phenomenally valuable information: all of the transaction data of who is paying whom on the Libra network! Now here’s where I’m a little confused and/or suspicious, and I’d love insight here from anyone who knows: Facebook is apparently charging $10 million for the right to run a node.
- Now, why would somebody do that? Well, it depends on what actual information these nodes are processing, and how closely it can be tied back to the people making those purchases. If all of this payment data is NOT anonymous – in other words, if someone running a node was actually able to see identifiable purchases – then a) $10 million seems way to cheap; and b) people are gonna get really mad about this. (Never mind the fact that plenty of people already have and purchase this information, today. But Facebook isn’t going to get the benefit of the doubt from anyone on this.)
- Hence, I suspect that the way this’ll work in its real implementation will be something like pseudonymous identification – like node operators can see identities of anyone using the platform directly, but if someone uses it through WhatsApp or another Facebook app, for instance, the node operators will see one-time identifiers simply indicate that a transaction has happened, and not by whom. (This is similar to how Apple Pay works.) That’s my guess, anyway. (I haven’t read the entire white paper and if this is covered, please let me know, lazyweb!)
As you’d expect, Everyone! Has! So! Many! Opinions! about Libra. One particularly good set of resources for learning more is this Google Doc put together by Rhys Lindmark and friends for the CryptoEthics Reading Group.
There’s one take I haven’t heard yet, though, which seems quite obvious to me: it starts with the question, Why is Facebook being so deliberate about framing this as a cryptocurrency?
I think the answer’s pretty clear: they need “cryptocurrency” to be their strawman.
I mean, consider the alternative: they could easily have gone the opposite direction, and marketed the exact same product as a “Digital currency built by adults, for adults, not like all that crypto nonsense that you knew was all volatility and scams” or some such thing. Many smart people who’ve been paying attention to Libra have written off the “crypto” label as a sideshow, like Tyler Cowen on Tuesday. And they’re not wrong, because from their point of view, the cryptocurrency element isn’t important. What matters are questions like “how is it collateralized” and “how does KYC work” and “what is its monetary policy” and “can George Soros break Facebook if he wanted to” and other sensible questions around how Libra works as money. They couldn’t really care less about it as a crypto protocol.
Members of the Libra team, it seems, haven’t always cared to talk about why this had to be done on a blockchain per se; not right now anyway. In response to Tyler Cowen’s assertion that the crypto element of Libra was unimportant, Christian Catalini (an economist on the Libra team) helpfully offered, “The crypto angle will be key for competition, low barriers to entry and innovation, and because it complements strong local institutions to create global spillovers”, which is a whole mouthful of nonsense. That’s what you say when you want someone to go away and stop asking questions, not when you’re actually inviting them to do any of those things.
But I think Facebook is doing something quite clever here: in marketing Libra explicitly as a “cryptocurrency”, what it’s doing (whether consciously or not) is positioning itself in contrast to actual cryptocurrencies like Bitcoin and Ethereum, and then setting them up as straw men for Facebook to make the case for why Big is Good and why it shouldn’t be broken up in antitrust court.
That’s a weird idea so let me unpack it a bit. If you’re Facebook, independent of Libra and just generally, you need to continuously make the case for why Facebook’s Huge Size and Closed Walled Garden-ness are good and important properties, as opposed to bad and evil properties that need to be broken up by the government. Now, if you wanted to demonstrate why Big and Closed is important and valuable, one way you could do this is by drawing comparison to its opposite: Open and Decentralized. Like the crypto community, for instance!
The minute this becomes a conversation about crypto, it becomes a conversation about all of the problems with crypto (as understood by regulators and, especially, legislators). And once it becomes a conversation about the problems with crypto, then Libra looks better along virtually every angle! It’s stable. It’s collateralized. It’ll (probably, mostly?) be KYC-compliant in actuality, not just in theory. It doesn’t just make Libra look good, it makes Facebook look good – far better than if they’d launched a generic “digital currency” and had everyone attack them for being a predatory monopoly.
So, when David Marcus goes in front of the Senate Banking Committee on July 16, watch for him to set up real cryptocurrencies like Bitcoin as a straw man, against which Libra Coin can be held up as a solution to their problems. Which, in turn, turns into The problems with open and decentralized means the solutions are big and closed. If Marcus and Libra are able to create a narrative of “As you know, crypto is inevitable. It’s happening. But here’s a better, friendlier, more responsible version that you can understand”, then they’ll have done their jobs.
Don’t fall for it. But do watch it, though. I’ll be a fantastic illustration of what’s becoming the central drama of our current age of software, and potentially of the next very long time: this new kind of Scarcity that is “closed access”, which we simultaneously hate but want so very badly. I’m sure this episode will make it into a chapter of Scarcity in the Software Century somewhere down the line.